Very good article — I agree with most of your conclusions.
However, I think there are two conceptual issues worth clarifying:
1. The mean doesn’t imply that half of investors must be below it. A distribution can be very skewed — many slightly below average and a few far above. In fact, that’s exactly how the distribution of individual stock returns looks: many slightly underperform the average, and a few massively outperform it. Why should the distribution of fund returns (baskets of those same stocks) be any different?
2. It’s also not strictly correct to say that before costs, what one active investor outperforms, another must underperform. Active management as a whole is not necessarily a zero-sum game, as Sharpe’s arithmetic suggested. In principle, the active segment could collectively outperform the index if it allocates capital more efficiently (taking advantage of corporate events and net fund flows). I just wrote about this, summarizing Pedersen’s response and reinterpreting the Gotrocks family story: https://sudapollismo.substack.com/p/gestion-activa-no-suma-cero
Brian, The data I showed included RISK ADJUSTED returns which showed 97% failure rate by SPIVA which is RIGHT in line with academic papers which have found less than 2% of active managers outperform. Second, the studies find the SAME RESULTS in international markets, just need to know the data. SPIVA does publish it. Third, the studies back to the 1950s have found the very same results only directionally the percentage of failures has persistently INCREASED as I showed in The Incredible Shrinking Alpha and why.
Fourth, owning systematically managed funds, like those of DFA, Avantis, etc means there is a PLAN TO SELL when an asset no longer meets the eligible universe criteria.
Finally, you seek undervalued assets meaning you believe you are smarter than the leading financial researchers who are setting prices daily when the vast majority of pros fail, what skills do you have that leads you to think you can do better? Rhetorical question.
Very good article — I agree with most of your conclusions.
However, I think there are two conceptual issues worth clarifying:
1. The mean doesn’t imply that half of investors must be below it. A distribution can be very skewed — many slightly below average and a few far above. In fact, that’s exactly how the distribution of individual stock returns looks: many slightly underperform the average, and a few massively outperform it. Why should the distribution of fund returns (baskets of those same stocks) be any different?
2. It’s also not strictly correct to say that before costs, what one active investor outperforms, another must underperform. Active management as a whole is not necessarily a zero-sum game, as Sharpe’s arithmetic suggested. In principle, the active segment could collectively outperform the index if it allocates capital more efficiently (taking advantage of corporate events and net fund flows). I just wrote about this, summarizing Pedersen’s response and reinterpreting the Gotrocks family story: https://sudapollismo.substack.com/p/gestion-activa-no-suma-cero
Brian, The data I showed included RISK ADJUSTED returns which showed 97% failure rate by SPIVA which is RIGHT in line with academic papers which have found less than 2% of active managers outperform. Second, the studies find the SAME RESULTS in international markets, just need to know the data. SPIVA does publish it. Third, the studies back to the 1950s have found the very same results only directionally the percentage of failures has persistently INCREASED as I showed in The Incredible Shrinking Alpha and why.
Fourth, owning systematically managed funds, like those of DFA, Avantis, etc means there is a PLAN TO SELL when an asset no longer meets the eligible universe criteria.
Finally, you seek undervalued assets meaning you believe you are smarter than the leading financial researchers who are setting prices daily when the vast majority of pros fail, what skills do you have that leads you to think you can do better? Rhetorical question.